What Is An IPO?
IPOS present an exciting adventure into the world of risk for the avid investor and speculator alike. Often, the reward can be a large profit. What is an IPO you ask? Read on to find out more.
Remember, every blue chip stock trading on the markets today was, at one time, an IPO. On the down side, consider too, all those share certificates cluttering dresser drawers or sitting in strong boxes of dusty attics, representing the dreams of investors who put money into companies that no one remembers.
What is an IPO? An IPO, or initial public offering, is when a privately held company makes its first share offering to the public.
The shares which the company puts on the market are directly owned and issued by the company, so that when they are purchased by the public, the cash generated goes directly to the company. As opposed to future trades of those shares on the market, in which case the cash transfers from one investor to another. The intent an IPO is to raise capital necessary to carry out some form of a corporate growth plan. Of course, you can readily see, the uncertainty in knowing what the stock will do once market trading begins.
IPOs are not always issued by small, start-ups or companies that are not much more than a great idea, though these are definitely most intriguing. Many IPOs are issued from well established, well run, privately owned companies which for various reasons, find themselves in transition, and going public becomes a part of that change. These organizations come with an established financial track record which can be assessed and diagnosed before turning over your cash.
Historically, there was a time new ventures could just start up and issue stock to a willing public with unbridled restraint. Have an idea, a concept, just sell a piece of it. That is often how IPOs used to take shape. Obviously, that approach became a wide-open door to swindlers and was wrought with fraud. Up stepped various levels of government with legislation to protect its citizens, self-regulating industry agencies to enforce compliance, and watchdog organizations to monitor activities. Now-a-days the road to an Initial Public Offering is not an easy one. There are some stringent prerequisites to meet and sometimes tough ongoing regulations which must be adhered. All this makes it easier for the investor to do his homework and reduce corporate deceit, but to be sure, there are still no guarantees.
For some companies, the cost can be a delaying or even prohibitive factor and for others it might be the amount of reporting and required supporting documentation filings with the appropriate security exchange commissions holding them back from an IPO.
In Canada, the process of selling shares to the public for the first time is only slightly less complicated and less expensive. There were 90 IPO’s which made it all the way to the TSX and TSX Venture exchanges in 2007. The combined value of the equity raised by these issues was $3.4 billion. That is much less activity than the norm over the past decade. By comparison, 109 new issues worth $5.6 billion made their way on to those markets in 2006.